2010 (7) TMI 296 - HC - Income Tax

Deduction under Section 80P(2)(a)(i) of the Income-tax Act - in respect of interest earned on deposits of non-SLR and surplus funds in non statutory reserves - Held that - investment of the funds by the banks including the non reserves were part of the banking activities since no bank would like its reserve funds to remain idle and not earn any interest - interest earned on such deposits is directly attributable to the business of banking - questions raised are answered in favour of the assessee and against the revenue and the appeal is dismissed

Summary

Issues:
1. Entitlement to deduction under Section 80P(2)(a)(i) of the Income-tax Act for interest earned on deposits of non-SLR and surplus funds in non-statutory reserves.
2. Correctness of ITAT's decision regarding the allowability of deduction under Section 80P(2)(a)(i) for such income in comparison to a judgment related to income from investment of statutory reserves only.

Analysis:
Issue 1: The main issue in this appeal was whether the assessee cooperative bank was entitled to a deduction under Section 80P(2)(a)(i) of the Income-tax Act for interest earned on deposits of non-SLR and surplus funds in non-statutory reserves. The court referred to a previous judgment where it was held that the income earned on such deposits is directly attributable to the business of banking. The court emphasized that any banking institution would invest its reserves to earn income, and such investments are considered part of banking activities. Therefore, the interest earned on these deposits was deemed to be directly attributable to the business of banking, leading to a favorable decision for the assessee.

Issue 2: The second issue raised in the appeal questioned the correctness of the ITAT's decision in allowing the deduction under Section 80P(2)(a)(i) for the income in question. The court noted that the ITAT's decision was in line with a judgment related to income from investment of statutory reserves only. However, the court clarified that the investment of funds by banks, including non-reserves, is part of banking activities as no bank would keep its reserve funds idle. The court reiterated that interest earned on such deposits is directly attributable to the business of banking. Consequently, the court dismissed the appeal based on the law laid down in the previous judgment and ruled in favor of the assessee, rejecting the revenue's arguments.

In conclusion, the High Court of Himachal Pradesh upheld the entitlement of the assessee cooperative bank to a deduction under Section 80P(2)(a)(i) for interest earned on deposits of non-SLR and surplus funds in non-statutory reserves. The court's decision was based on the principle that such income is directly attributable to the business of banking, as established in a previous judgment. The court's analysis focused on the nature of banking activities and the prudent business management involved in investing reserve funds to earn interest, ultimately leading to a favorable outcome for the assessee.